KYC: Get To Know Your Customers Before You Onboard Them

If John Smith from Canada wants to use your service, how do you know that he's not a money launderer from Mozambique, a drug dealer from Mexico or a weapon smuggler from the Middle East? The Financial Industry Regulatory Authority (FINRA) implemented Rule 2090 for precisely this reason. Rule 2090 states that you must keep a record on the profile of every customer using your services. This is called the Know Your Customer rule or KYC for short.

So how do you keep a customer profile? The Customer Identification Program (CIP) requires that companies obtain four key pieces of information: name, address, date of birth and ID number. You can verify these by asking for a government issued ID such as a passport or drivers license, and a proof of address such as a bank statement or utility bill. Additional documents may be required for higher risk customers, such as purpose of payment (POP) files for larger transactions,

Some parts of the world may be more disciplined than others. The United States for example, are particularly careful when it comes to KYC laws. FinCEN, the U.S Financial Crimes Enforcement Network, requires all firms to comply with KYC standards in order to prevent the facilitation of any criminal activities, such as money laundering or terrorism. If you are to detect any suspicious or illegal activity on your site, you are required to report it to the financial authorities.

Whilst these standards are upheld for government owned currencies, such as pounds and dollars, there is some debate surrounding the KYC laws on the cryptocurrency market. This is because the crypto market is decentralised, ie. not owned by any one bank or state. The appeal of a decentralised market is in the privacy and freedom individual users are afforded with their finances. Customers may not want to share their data with companies, as it could be hacked, stolen or used to control their money.

On the other hand, the relaxing of traditional KYC laws puts companies at much greater risk of falling victim to money laundering and other criminal activities. Therefore, it is still important for all companies to establish mutual trust and get to know customers before they onboard them. The customers should know that their personal data is safe, and the companies should know that their customers are clear from any criminal activity.

The bottom line, get to know your customers before you onboard them. Collect the necessary data and be sure to monitor and report any suspicious or criminal activity. After all, the John Smith you just opened an account for might just be the next money launderer from Mozambique.